The question of whether you should pick a high or low deductible on your home insurance is one that all homeowners face. The short answer is that it depends on your financial situation.
All things being equal, homeowners want lower out-of-pocket expenses when making an insurance claim. Understanding that want, it is a priority to balance the risk of having an insurance claim versus how much they want to pay out of pocket. A lower deductible means less money you have to pay for a covered claim. The challenge is whether the higher premiums associated with a lower deductible are worth paying.
Deductibles and risk sharing
Deductibles are a useful feature on home insurance policies because they make sure both parties take on some of the risk. Taking on a higher deductible means you’re responsible for more of the loss if a covered peril damages your property, so it also results in a lower premium.
The argument is that a higher deductible results in fewer overall claims because claims that don’t exceed your deductible amount are your responsibility.
On the other hand, a lower deductible usually means a higher premium because you’ve taken on less of the risk of insuring your home.The benefit, however, is that more losses will be covered.
An example of the deductible-premium relationship
Here is an example of the deductible-premium relationship. Suppose a homeowner with a $500 deductible pays an annual premium of $5,000. Increasing this deductible to $1,000 or $2,000 could potentially reduce the premiums by 5%, 10%, or more.
However, saving on premiums increases your potential out-of-pocket expenses should a home insurance claim occur.
Your risk tolerance will tell you: Is it better to have a high or low deductible for home insurance?
Choosing a higher deductible to save on your yearly premium might be good for your budget, especially if you live in a high-risk area. It might also make sense if you simply want the lowest possible premium to comply with lender requirements.
That choice comes with some risk, so be careful. You don’t want to pick a deductible amount that’s so high that you can’t afford to repair your home if you experience a covered claim.
If you have a low tolerance for risk, and you can afford a higher premium, then you may want to choose a lower deductible amount.Your home insurance might cost more, but you might have greater peace of mind.
